Tag Archives: credit reports

April 16, 2014

EEOC Loses Kaplan Credit Check Appeal

In 2010, the Equal Employment Opportunity Commission (EEOC) sued Kaplan Higher Education Corporation, claiming that Kaplan’s use of credit reports had a disparate impact on black applicants. The trial court threw out the EEOC’s suit because it used an invalid method for determining the race of Kaplan’s applicants. The EEOC appealed, and lost again. In a stinging opinion, the Sixth Circuit Court of Appeals agreed with Kaplan and rejected the methodology promoted by the EEOC’s expert witness. The Sixth Circuit’s opinion dooms the agency’s background check disparate impact lawsuit against Kaplan and slaps the EEOC for suing a private employer “for using the same type of background check that the EEOC itself uses.” The ruling also illustrates the EEOC’s failure to show that an employer’s use of neutral background checks results in a disparate impact on African-American applicants. EEOC v. Kaplan Higher Educ. Corp., No. 13-3408 (6th Cir. April 9, 2014).

Credit Checks Aimed At Preventing Employee Abuses

Kaplan is a for-profit test preparation and higher education provider. Because some Kaplan students receive financial aid, some Kaplan employees have access to students’ financial information, including information that is subject to the U.S. Department of Education confidentiality regulations. Years ago, Kaplan discovered that some of its financial-aid officers had stolen aid payments and some executives had engaged in self-dealing by hiring relatives as vendors for the company. To help stop these abuses, Kaplan began conducting credit checks on applicants for senior-executive positions as well as accounting, financial aid and other positions where employees have access to company or student financial information. Neither Kaplan nor its credit check vendor provided or linked the applicant’s race with the applicant’s credit report.

EEOC Alleges Kaplan’s Credit Checks Screen Out More African-Americans

Consistent with its efforts to target employers who use background check policies to screen applicants, the EEOC sued Kaplan alleging that Kaplan’s use of credit checks resulted in more African-Americans being rejected than whites, creating a disparate impact in violation of Title VII. To support its claim, the EEOC hired industrial and organizational psychologist Kevin Murphy to analyze Kaplan’s credit check data and offer an expert opinion based on the statistics. However, because the credit check information did not include the applicant’s race, Murphy and his team needed another method to determine race. They created a process that the EEOC called “race rating” in which a team of five “race raters” reviewed drivers’ license photos for a portion of the applicants to visually identify their race. Despite having credit information for 4,670 applicants, Murphy based his “expert” analysis on only 1,090 applicants, of whom 803 had been racially classified using Murphy’s “race rating” process.

“Homemade Methodology” Rejected by Court

The Sixth Circuit wholeheartedly rejected Murphy’s “race rating” process, stating that “[t]he EEOC brought this case on the basis of a homemade methodology, crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself.” The Court upheld the exclusion of Murphy’s testimony not only due to his faulty methodology, but also because the group of 1,090 applicants in Murphy’s statistical analysis was not representative of the applicant pool as a whole. Of Kaplan’s entire pool of 4,670 applicants, only 13.3% of the applicants were rejected on the basis of credit checks, but Murphy’s smaller pool of applicants had a fail rate of 23.8%. The Court found that Murphy’s unrepresentative sample might not equate to the respective fail rates of black versus white applicants and therefore, was an unreliable method for the EEOC to show disparate impact.

EEOC’s Own Background Check Policy Contradicts Its Attack on Private Employers For Use of Credit Checks

Although not central to the exclusion of the EEOC’s expert, the Court put the EEOC’s own background check policy front and center. Through the discovery process, Kaplan had successfully obtained information on the EEOC’s background check policies and pointed to the agency’s personnel handbook which states “[o]verdue just debts increase temptation to commit illegal or unethical acts as a means of gaining funds to meet financial obligations.” To address those potential concerns, the EEOC runs credit checks for 84 of the 97 positions within the agency. The Court highlighted the disconnect between the EEOC attacking Kaplan for a credit check policy that the agency used itself.

Future EEOC Challenges to Employer Use of Credit Checks

The Kaplan decision is the latest in a string of EEOC losses in class actions alleging disparate impact based on an employer’s use of a neutral background check process. The EEOC seems unable to provide evidence to support a finding that African-Americans, Hispanics or other groups are being rejected for employment at higher rates than whites based on background checks. In addition, the EEOC’s own use of credit checks in hiring will be used against it in any future similar lawsuits. Although it remains to be seen whether the EEOC will back off of its systemic enforcement efforts related to the use of background checks, the trend for employers is positive.

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May 6, 2013

Colorado Restricts Employers’ Use of Credit Reports

By Mark Wiletsky

Employers using credit reports to evaluate applicants and employees take note: Colorado recently enacted the “Employment Opportunity Act” limiting the use of credit reports in employment decisions. In passing this law, Colorado joins eight other states–California, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont and Washington–in restricting employers from obtaining and/or using credit history information when evaluating applicants and employees. The new Colorado law exempts certain job positions from the prohibition on the use of credit reports, but the exceptions are very fact specific. Employers need to analyze the job responsibilities of the position at issue in order to determine if they may use credit information under this new law.

Prohibition on the Use of Consumer Credit Information for Employment Purposes

Effective July 1, 2013, section 8-2-126 of the Colorado Revised Statutes provides that an employer shall not use consumer credit information for employment purposes unless the credit information is substantially related to the employee’s current or potential job. This means that Colorado employers are prohibited from using credit information in the employment context except in those limited situations where credit or financial responsibility is substantially related to the job. The type of information prohibited under this law includes any written, oral or other communication of information that bears on a consumer’s creditworthiness, credit standing, credit capacity or credit history. This includes a credit score, but does not include the name, address or date of birth of an employee associated with a social security number.

“Substantially Related” Analysis Looks to Job Responsibilities

When determining whether a particular position falls within the exception where credit information is “substantially related to the employee’s current or potential job,” employers may not rely on an informal, best-guess determination. Instead, employers must carefully analyze whether the job in question meets the parameters detailed in the new law.

Under Colorado’s law, “substantially related to the employee’s current or potential job” is defined to apply to positions that:

1) Constitute executive or management personnel or officers or employees who constitute professional staff to executive and management personnel, and the position involves one or more of the following:

A) Setting the direction or control of a business, division, unit or an agency of a business;

B) A fiduciary responsibility to the employer;

C) Access to customers’, employees’, or the employer’s personal or financial information (other than information ordinarily provided in a retail transaction); or

D) The authority to issue payments, collect debts or enter into contracts; OR

2) Involves contracts with defense, intelligence, national security or space agencies of the federal government.

Consider this example: you are hiring a human resource specialist who will administer employee benefits within your company. May you obtain and use a credit report on applicants for this position? Assuming this position does not involve federal defense, intelligence, national security or space agency contracts, you first must determine if this position is an executive or management position, or alternatively, if this position is considered professional staff to an executive or manager. In our example, the employee benefits specialist position may or may not be an executive or management position at your company. If not, the position may be considered professional staff to an executive or manager if the position reports to an HR Director, Vice President or other similar high level manager or officer. If we assume this position meets this threshold determination, you next must analyze if the position involves one or more of the four areas of responsibilities where credit information will be deemed substantially related. Because an employee benefits specialist is likely to have access to employees’ personal and perhaps financial information, it appears to fall within the third area of responsibility where credit information will be deemed substantially related to the job, but the answer is certainly not clear-cut.

Requesting Employee Consent to Obtain a Credit Report

In addition to the prohibition on the use of credit information for employment purposes, the new Colorado law prohibits employers or their agents from requiring an employee to consent to a request for a credit report that contains information about the employee’s credit score, credit account balances, payment history, savings or checking account balances, or savings or checking account numbers as a condition of employment unless:

1) The employer is a bank or financial institution;

2) The report is required by law; or

3) The report is substantially related to the employee’s current or potential job andthe employer has a bona fide purpose for requesting or using information in the credit report and is disclosed in writing to the employee.

The written disclosure requirement here is a new procedural step with which most employers meeting this exception will not be familiar. Employers meeting these criteria now need to provide applicants/employees with a notice of their business purpose for requesting credit information.

Employee May Be Allowed to Explain Circumstances Affecting Credit

In those cases when an employer is permitted to use credit information because it is substantially related to the job, an employer may ask the employee to explain any unusual or mitigating circumstances that affected their credit history. For example, if the credit report shows delinquent payments, the employer may inquire further allowing the employee to explain circumstances that may have caused the delinquencies, such as an act of identity theft, medical expense, a layoff, or a death, divorce or separation.

Adverse Action Disclosure Required

If the employer relies on any part of the credit information to take adverse action regarding the employee or applicant, the employer must disclose that fact and the particular information relied upon to the employee. This disclosure must be made to the employee in writing but can be made to an applicant via the same medium in which the application was made (e.g., if the application was submitted electronically, this disclosure may be sent electronically).

FCRA Obligations Still Apply

Employers who are permitted to obtain and use credit reports under the Colorado law must also comply with the requirements of the Fair Credit Reporting Act (FCRA) in order to obtain a credit report from a consumer reporting agency. These additional FCRA duties include:

1) Providing a clear and conspicuous written disclosure to the applicant/employee before the report is obtained, in a document that consists solely of the disclosure, that a consumer report may be obtained;

2) Getting written authorization from the applicant/employee before obtaining the report;

3) Certifying to the consumer reporting agency that the above steps have been followed, that the information being obtained will not be used in violation of any federal or state equal opportunity law or regulation, and that, if any adverse action is to be taken based on the consumer report, a copy of the report and a summary of the consumer's rights will be provided to the consumer;

4) Before taking an adverse action, providing a copy of the report and a summary of FCRA consumer rights to the applicant/employee; and

5) After an adverse action is taken, sending an adverse action notice to the employee/applicant containing certain FCRA-required statements.

Credit Check Compliance

Colorado employers need to review and update their background check policies as they relate to conducting credit checks on applicants and existing employees. In addition to FCRA obligations, employers wishing to use credit reports have additional restrictions and duties under state law.

Employers now must analyze whether each position for which they wish to obtain credit reports meets the “substantially related to the employee’s current or potential job” criteria. If the position meets that criteria and the employer wishes to obtain a credit report on an applicant or existing employee, the employer first must provide a written disclosure to the applicant/employee describing the bona fide purpose of obtaining the credit information. If the credit report reveals questionable or negative information, the employer may (but is not required to) ask the applicant/employee to explain any unusual circumstances that may have led to the unfavorable credit information. If the employer rejects the applicant/employee for the position based in any way on the credit report, the employer must provide the required FCRA adverse action notices as well as a written explanation of the particular information in the report that led to the employer’s decision.

Multi-state employers face unique challenges when obtaining and using credit reports for employment purposes as they must comply with various state laws that now restrict such use. Given the intricacies of complying with the FCRA and applicable state laws, employers are wise to consult with their counsel to review and update their credit check policies.

January 30, 2013

EEOC Fails to Prove Credit Checks have Discriminatory Impact

By Mark B. Wiletsky

Is checking an applicant’s credit history discriminatory? According to the Equal Employment Opportunity Commission (EEOC), using credit checks to screen out applicants may be discriminatory if it has a disproportionately significant impact on a protected group. Although a court recently dismissed an EEOC lawsuit against an organization concerning its use of credit checks, the case should serve as a reminder to review your own policies and procedures with respect to using background and credit checks in the hiring process, as this is likely not the last time the EEOC or the courts will address the issue.

EEOC Sues Claiming Use of Credit Checks Has Disparate Impact on Black Applicants

In December 2010, the EEOC sued Kaplan Higher Learning Education Corporation (Kaplan), alleging that Kaplan’s practice of using credit history in making hiring decisions has a disparate impact on Black applicants in violation of Title VII. In other words, the EEOC asserted that Kaplan’s use of credit histories—while not facially discriminatory—had a disproportionate impact in terms of screening out Black applicants. Kaplan, however, defended its use of credit histories in the hiring process. It claimed that it used credit reports to assess applicants for financial and operational positions after discovering system breaches that allowed business officers to misappropriate student funds. Kaplan asserted that it reviewed an applicant’s credit history to determine whether the individual is under “financial stress or burdens” that might compromise his or her ethical obligations.

In order to provide statistical analysis showing disparate impact on Black applicants, the EEOC relied on its expert, Dr. Kevin Murphy, to analyze the applicant pool and those rejected due to their credit report. Because the race of each applicant was not known, the EEOC’s expert tried to use other means to make determinations about the applicant’s race, even when it was not known.

Kaplan asked the Court to exclude Dr. Murphy’s testimony and report and ultimately, dismiss the EEOC’s case, arguing that Dr. Murphy’s method of determining race was scientifically unsound. The Court agreed. In the absence of any reliable, scientifically sound evidence to link the use of credit reports to race, the Court granted summary judgment to Kaplan.

Use of Credit Reports Going Forward

In the last four or five years, the EEOC has made an issue out of employers’ use of credit reports and criminal history records in hiring decisions, resulting in the filing of a number of lawsuits. The EEOC’s track record in these cases, however, is mixed. In an earlier case alleging disparate impact related to the use of criminal history records, the EEOC finally agreed to dismiss the case after more than three years while the federal court ordered sanctions of over $750,000 against the EEOC for continuing to litigate when it knew of fatal flaws in proving disparate impact. (See EEOC v. Peoplemark, Inc., No. 08-cv-907 (W.D. Mich. 2008)). On the other hand, the EEOC was able to obtain a $3.1 million settlement and policy revisions from Pepsi when it challenged Pepsi’s use of background checks in 2011.

Despite the EEOC’s spotty results in proving disparate impact in these background check cases, employers need to be careful and deliberate in how they use credit reports for hiring purposes. Credit reports should be used only where job-related, such as for applicants seeking positions involving financial responsibility, high level managerial decisions or as required by law. Conduct credit checks only after making a conditional job offer so as not to weed out candidates prematurely on the basis of credit. Finally, be aware that eight states currently have statutory restrictions on the use of credit history in employment decisions so if you are located or are hiring in California, Oregon, Washington, Illinois, Maryland, Connecticut, Hawaii or Vermont, you will need to comply with those restrictions.